Virtually everything we do in business has changed in the last 100 years – products, services, process and technology. Everything but the way we pay people. We work in 21st century offices and factories, with a 19th century compensation strategy. Employees fundamentally exchange time for money, just as they did on Henry Ford’s production line. Work 40 hours, get paid – work 50 hours, get paid more. Fixed hourly or salaried compensation gets you fixed employee performance and engagement. This generally results in a level of performance and productivity substantially below what may be available and needed in today’s competitive and cost conscious environment. Do you have 125 employees doing what 100 highly motivated and engaged employees could do? The data would suggest you do.
Recognizing this opportunity, many have attempted to bridge the gap between fixed wages and business performance, by utilizing individual/departmental incentives, piece work, profit sharing, gain sharing, and other types of bonus programs. Some use terms like “total rewards” to describe their holistic attempts to attract, retain and motivate employees. My experience indicates many of these approaches suffer from the, “can’t see the forest for the trees” syndrome. The attempts are overly complicated. I read a recent article in an HR magazine that identified 23 different variables in “total rewards”. Human-beings have pretty basic needs. Everyone knows the food, water, shelter thing. A similar set of basic needs exists among your employees. Knowing what the top three needs are, will go a long way in having your employees fully engaged and performing at industry leading levels. Let’s work on those first, then we’ll worry about the other 20. If we satisfy basic needs, we can truly engage associates in the performance of the business, increase their productivity and effectiveness, and drive significant improvements in organizational performance and financial results.
Back to exchanging time for money… note that neither hours worked, or rates of pay are ever mentioned in any financial statement. I have assessed 500 to date, never seen it. It is not what you are paying people, it’s what you are getting for what you are paying. An ideal environment would be where you have the highest payed employees that cost the business the least amount of money. In other words, would you rather have 125 employees being paid$12/hr + fringes, or 100 employees earning $12 + a 15% performance bonus + fringes, producing the same output as 125? I think the answer is obvious. The 100 higher paid employees cost you much less…in total. The same math works for salaried employees.
Now, the million dollar question – how do you get 100 employees to perform at the level of 125, or 1,000 to perform like 1,250? Variable compensation is one very important ingredient, but not the only. For this post however, let’s stick with it. There are but a few fundamentals that MUST be incorporated into a highly functioning performance based compensation stragety – all of the below points are “behavioral triggers”, producing real change in the way employees perform… at all levels.
- The compensation formula must be thoroughly understood and trusted. Easily said, rarely done.
- Variable compensation must be timely – monthly. Ties to financial results and effects behavior.
- The variable component MUST effect employees standard of living. Otherwise it’s beer (or whatever) money.
- Strong and visible senior leadership support. Demonstrates seriousness and support.
- Employee bonuses must strongly correlate to readily visible, incremental, profit/ebitda gains to the corporation. Fair and equitable.
NOTE: There are 3 critical words that should appear in every discussion regarding performance based compensation – behavioral change, and Ebitda ( profit, or whatever your financial metric is). In other words, how is your variable or performance based compensation system driving behavior and profits? If you can’t answer that question specifically… STOP. Let’s talk!
There are several other critically important factors in driving organizational performance via engage, motivated employees. Many of these are over-looked, or misunderstood by management. I will address them in the next post entitled Fatal Flaws.